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Cypress Semiconductor Corporation CY reported adjusted second-quarter 2016 earnings of 8 cents per share, beating the Zacks Consensus Estimate by 3 cents. Adjusted earnings exclude one-time items but include stock-based compensation expense.

Revenues

Cypress reported non-GAAP revenues of $456.4 million, up 7.4% sequentially. Revenues were within management’s guided range of $440.0–$470.0 million, and slightly above the Zacks Consensus Estimate of $455.3 million.

Revenues by Business Units

Even after the merger with Spansion Inc. in Mar 2015, Cypress continues to report revenues under the divisions: Programmable Systems Division (PSD), Memory Products Division (MPD), Data Communication Division (DCD) and Emerging Technology Division (ETD).

Revenues from the PSD segment increased 2% sequentially to $166.8 million, driven by strong growth in the automotive, microcontroller and PSoC solutions. Notably, the legacy Cypress automotive business grew almost 47% year over year.

The MPD segment generated revenues of $244.4 million, up 14% sequentially due to the seasonal increase in memory, particularly in the company’s Flash business.

Revenues from DCD improved 27% sequentially to $25.5 million. The increase was driven by solid performance in the trackpad business and growth in USB Type-C.

The company continues to see strong design win momentum in the USB Type-C product.

Revenues from ETD were $19.7 million, down 24% sequentially.

Operating Results

Pro-forma gross margin was 36.0%, down 33 basis points (bps) sequentially. The decrease was due to lower factory utilization as part of a lean inventory initiative, which aims to run wafer fabs at a rate lower than actual demand capacity to burn off excess inventory.

Operating expenses (research & development + selling, general & administrative) of $152.7 million increased 2.6% sequentially. As a percentage of sales, research and development expenses decreased, while selling, general and administrative expense increased.

GAAP net income was ($519.3) million or a loss of $1.65 cents per share versus ($104.0) million or loss per share of 32 cents in the previous quarter. Excluding special items but including stock-based compensation expense, non-GAAP earnings per share came in at 8 cents compared with a breakeven in the previous quarter.

Balance Sheet

Cypress exited the quarter with cash, cash equivalents and short-term investments of approximately $189.3 million compared with $87.1 million last quarter. Trade receivables were $325.1 million, up from $297.9 million in the prior quarter. Net inventory was $220.9 million, down from $225.8 million in the prior quarter.

During the quarter, Cypress’ cash flow from operations was roughly $8.8 million and capex was $12.8 million. The company also paid quarterly dividend worth $34.3 million.

Guidance

Management expects third-quarter 2016 revenues in the range of $510.0–$514.0 million. The Zacks Consensus Estimate is pegged at $466.8 million.

Consolidated gross margin is expected to increase to 41.0%, depending on utilization, product and customer mix. The increase is driven by higher utilization, a seasonal revenue increase and contribution from the wireless IoT business. Operating expenses are likely to be within $147–$150 million.

Earnings per share are expected in the range of 12 cents to 16 cents. The Zacks Consensus Estimate is pegged at 8 cents for the upcoming quarter.

Our Take

Cypress is a semiconductor company that offers high-performance, mixed signal and programmable solutions. The company reported a decent quarter with both the top and bottom line exceeding the Zacks Consensus Estimate.

During the quarter, design win momentum and market share gains continued. Cypress also closed its acquisition of Broadcom's Wireless Internet of Things (IoT) business. The deal will strengthen Cypress' position in the key embedded systems markets, namely automotive and industrial markets and the high-growth IoT market.

Also, the company expects $180 million synergies associated with the Spansion merger by the end of this year. The integration remains well on track and Cypress is witnessing new opportunities at top-tier customers, particularly in the automotive and industrial markets. These markets now account for 58% of the company’s sales, bringing in more stable revenues and margins.

However, a weak and uncertain macro environment, limited visibility and intensifying competition are nagging concerns.